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A)
B)
C)
D)
1.In the long run, what determines the gross domestic product in an economy?
the interest rate and the amount of national saving
the quantities of capital and labor, and the production technology
consumption, investment, and government spending
the marginal products of capital and labor, constant returns to scale, and competition
A)
B)
C)
D)
2.Unlike the real world, the classical long-run macroeconomic model (as in chapter 3)
assumes that:
all capital and labor is fully utilized.
all capital is fully utilized but some labor is unemployed.
all labor is fully employed but some capital lies idle.
some capital lies idle and some labor is unemployed.
A)
B)
C)
D)
A)
B)
C)
D)
A)
B)
C)
D)
A)
B)
C)
D)
A)
B)
C)
D)
A)
B)
C)
D)
A)
B)
C)
D)
9.Assume that Y denotes gross domestic product, T denotes the net tax revenue of the
government, and C denotes total consumption spending. If the consumption function is C
= 500 + 0.5(Y T), and Y is 6,000 and T is given by T = 200 + 0.2Y, then C equals:
2,500.
2,800.
3,500.
4,200.
A)
B)
C)
D)
10.If the consumption function is given by the equation C = 500 + 0.5Y, the production
function is Y = 50K0.5L0.5, where K = 100 is the total stock of capital and L = 100 is the
amount of labor, then C equals:
1,000.
2,500.
3,000.
5,000.
A)
B)
C)
D)
11.If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then
C increases by:
0.15 unit.
0.5 unit.
0.85 unit.
1 unit.
12.If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then
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A)
B)
C)
D)
savings:
decreases by 0.85 unit.
decreases by 0.15 unit.
increases by 0.15 unit.
increases by 0.85 unit.
A)
B)
C)
D)
13.If the consumption function is given by C = 150 + 0.85(Y T) and T increases by 1 unit,
then private savings:
decreases by 0.85 unit.
decreases by 0.15 unit.
increases by 0.15 unit.
increases by 0.85 unit.
A)
B)
C)
D)
A)
B)
C)
D)
A)
B)
C)
D)
16.Assume that the investment function is given by I = 1,000 30r, where I is investment
spending and r is the real rate of interest (in percent: that is, if the real interest rate is 6
percent, then r = 6). Assume further that the nominal rate of interest is 10 percent and the
expected inflation rate is 2 percent. According to the investment function, investment will
be:
240.
700.
760.
970.
A)
B)
C)
D)
17.If government purchases (G) exceed net taxes (that is, T or taxes minus transfer
payments), then the government budget is:
balanced.
in deficit.
in surplus.
endogenous.
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A)
B)
C)
D)
A)
B)
C)
D)
A)
B)
C)
D)
20.Y C G equals:
national saving.
private saving.
public saving.
financial saving.
A)
B)
C)
D)
A)
B)
C)
D)
A)
B)
C)
D)
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A)
B)
C)
D)
A)
B)
C)
D)
25.If income is 4,800, consumption is 3,500, government spending is 1,000, and net tax
revenues are 800, public saving is:
200.
200.
500.
1,800.
A)
B)
C)
D)
26.Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C =
500 + 0.6Y. No government exists (G = T = 0). In this case, equilibrium investment (I) is:
1,500.
2,000.
2,500.
3,000.
A)
B)
C)
D)
27.Assume that equilibrium GDP (Y) is 5,000. Consumption is given by the equation C =
500 + 0.6(Y T). Net taxes (T) are equal to 1,000. Government spending is 600. In this
case, equilibrium investment (I) is:
600.
1,100.
1,500.
2,200.
A)
B)
C)
D)
28.Assume that equilibrium GDP (Y) is 5,000. Consumption is given by the equation C =
500 + 0.6Y. Investment (I) is given by the equation I = 2,000 100r, where r is the real
interest rate in percent. No government exists (G = T = 0). In this case, the equilibrium
real interest rate is:
2 percent.
5 percent.
10 percent.
20 percent.
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C)
D)
investment increases.
investment decreases.
A)
B)
C)
D)
30.According to the model developed in Chapter 3, when taxes decrease and government
spending is unchanged:
consumption and investment both increase.
consumption and investment both decrease.
consumption increases and investment decreases.
consumption decreases and investment increases.
A)
B)
C)
D)
A)
B)
C)
D)
A)
B)
C)
D)
33.According to the model developed in Chapter 3, when taxes are increased but
government spending is unchanged, interest rates:
increase.
are unchanged.
decrease.
can vary wildly.
A)
B)
C)
D)
34.If there is a decrease in government spending and taxes are unchanged, then public
saving ______ and private saving ______.
increases; increases
increases; does not change
decreases; increases
decreases; does not change
35.According to the classical long-run macroeconomic model, a reduction in the government
budget deficit will lead to a:
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A)
B)
C)
D)
A)
B)
C)
D)
36.When government spending increases and taxes are increased by an equal amount,
interest rates:
increase.
remain the same.
decrease.
can vary wildly.
A)
B)
C)
D)
37.When there is a technological advance (such as the invention of the Internet) that leads to
an increase in businesses' desire to invest in new productive capacity, the equilibrium
level of investment:
increases and the interest rate rises.
is unchanged and the interest rate rises.
and the interest rate are both unchanged.
increases and the interest rate falls.
A)
B)
C)
D)
38.When the government lowers taxes on business investment, thus increasing desired
investment, but does not change government spending or taxes, the equilibrium level of
investment spending (I):
increases and the interest rate rises.
is unchanged and the interest rate rises.
and the interest rate are both unchanged.
decreases and the interest rate rises.
A)
B)
C)
D)
39.Suppose that GDP (Y) is 5,000. Consumption is given by the equation C = 500 + 0.5(Y
T). Investment (I) is given by the equation I = 2,000 100r, where r is the real interest
rate in percent. Government spending (G) is 1,000 and net taxes (T) is also 1,000. When a
technological innovation boosts the investment function to I = 3,000 100r:
I rises by 1,000 and r rises by 10 percentage points.
I rises by 1,000 and r is unchanged.
I is unchanged and r rises by 10 percentage points.
I is unchanged and r rises by 15 percentage points.
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C)
D)
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Answer Key
1.B
2.A
3.B
4.C
5.A
6.A
7.C
8.C
9.B
10.C
11.C
12.C
13.B
14.A
15.D
16.C
17.B
18.D
19.C
20.A
21.B
22.B
23.D
24.B
25.A
26.A
27.C
28.B
29.D
30.C
31.B
32.A
33.C
34.B
35.B
36.A
37.B
38.B
39.C
40.A
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